International Herald Tribune
Philip Bowring: Pundits of doom strike again in Asia
Thursday, September 4, 2008

HO CHI MINH CITY: This past week's panic in Vietnam and Korea is yet another reason why so-called international investment banks should be cut down to size.

Not content with causing mayhem in the financial markets of the United States and Europe, it seems that some investment banks and private equity managers have again set their sights on Asia, scene of the devastation they helped create a decade ago.

In recent weeks, two countries at opposite ends of the development spectrum have been subjected to panic selling by herd-instinct foreigners spreading wild rumors and setting off chain reactions among local investors.

First it was Vietnam, whose markets had been pumped up last year by a flood of foreign money that not only drove share prices sky high but caused massive expansion of credit, speculation in real estate, a flood of imports and general exuberance.

To be sure, a government with little experience in financial markets allowed the party to go on far too long, with money growth adding to a sudden rise in inflation due mainly to rising food prices and energy prices. A steep rise in interest rates and widening trade deficit then touched off panic selling, first of stocks, then bonds (whose yields soared to 26 percent), and then of the currency. Overwhelmingly negative foreign sentiment and a stampede of Vietnamese assets out of the country - a stunning contrast to the euphoria of a year ago - helped create a local sense of panic.

In reality, the situation was never as bad as it was made out to be. As a food and energy exporter, Vietnam benefited from higher prices, as did its farmers, the majority of the population. A skewed index exaggerated the extent of inflation, and much of the import expansion was investment related.

Indeed, while Western hot money exited, longer-term investors in factories - mostly from Japan, Korea and Taiwan - and in mines and energy projects continued to arrive.

Vietnam's growth rate, which has been averaging more than 7 percent, will certainly slow, due both to global conditions and tight money at home. The authorities have learned some lessons and in the end handled the panic well enough, using a mix of interest rates and strong-arm tactics. They still have work to do regulating their banks. But they have also learned to treat the opinions of much quoted investment banks and fund managers with caution.

More recently it has been the turn of South Korea, a developed economy where herd instinct sell notes from the investment banks and money managers drove the currency down 20 percent against the dollar in a year, 10 percent in a matter of days. It was repeatedly suggested by investment banks that Korea has serious current-account balance of payments problems, inadequate foreign reserves, high inflation, slowing growth and household debt problems threatening its banks. Indeed, a minor-key repeat of 1998 has been suggested.

Yet most of these pundits of doom come from countries that would love to have Korea's problems: a current account deficit of only 2 percent of gross domestic product, despite energy import dependence (compared to 4 percent to 6 percent for the United States, Britain, Australia and many countries in the Euro area); a GDP growth rate that may fall to 3 percent to 4 percent rather than the near zero faced by the United States and Europe; an inflation rate that is no more than the OECD average. Its foreign reserves are sixth largest in the world - at $243 billion they are probably too large, seven times those of Australia and more than half those of the whole Euro area. Its interest rates are above inflation at a time when others have negative real rates to fend off further financial collapse. There is scant likelihood of major financial bailouts being needed.

Yes, there are problems with household debt - but not with government debt, which is less than 40 percent of GDP. Yes, Korea is facing harder times as export growth slows and commodity prices remain relatively high. Yes, politics has undermined local confidence. Yes, corporate profits could fall and inventories are rising. But relative to almost all other OECD members, Korea is in reasonable shape.

In short, the past week's panic over the won is yet another reason why so-called international investment banks should be cut down to size, their gambling (with other peoples' money) reined in - and why economic news media should stop using their primary clients as their primary news and comment sources.